Investors and friends always used to ask me what being a portfolio manager was like. Sometimes, like at a conference for example, I couldn’t really tell the stories I wanted to. I had to keep things professional and, of course, in sales mode, as most portfolio managers do.

Now that I no longer manage money, though, I can reveal a few stories from the trenches from those days.

Investment committees are a pain

Many fund managers report to an investment committee to get trades approved by senior executives. These committees are kind of a joke, because the manager knows an investment far, far better. Also, with any committee, trade ideas tend to gravitate towards a common average, and a manager is always trying instead to produce uncommon returns.

Once, while I was on vacation long ago, my investment committee decided to sell all of my shares of ATI Technologies Inc. At the time, my fund was the largest shareholder in the company, and my committee did not like the stock’s technical chart pattern.

Upon my return, I was livid and threatened to quit. We bought back all the stock at a higher level, and I had some sweet revenge when ATI was acquired at a big premium about a year later.

Luck is sometimes more important than skill

In 1997, my mutual fund owned Bre-X Minerals Ltd. We had bought very early and it kept going up so we kept selling it. But I still had a decent-sized position.

My fund was supposed to be exclusively small caps, and Bre-X had very quickly blossomed into a $4-billion company. My boss kept telling me to sell it since it was no longer a small cap. I argued that I bought it when it was small, so I should still be allowed to keep some.

But he kept on about it, so I sold all my Bre-X shares, some of them to my boss’s mutual fund, to keep the peace. A few months later, Bre-X was revealed to be a total fraud, but I could happily let my investors know that I had exited my entire position well before it imploded. I looked like a hero, but it was complete luck.

In the spring of 2008, I found myself in Boston in front of 25 investment managers and analysts from Fidelity Investments, the world’s largest mutual fund manager. My colleagues and I were there to talk about an IPO, but they only wanted our views on one stock, Timminco Ltd., which was the hottest stock around at the time.

We spent 45 minutes explaining the silicon producer’s attributes, rather than making the original presentation. Fidelity did not own any shares at the time, but six weeks later, it revealed that it had accumulated more than 14% of the company, which explained a lot of the stock’s increase after our trip.

Ultimately, the stock was a disaster, but knowing that 25 of the brightest minds in the business thought it was great helped ease the pain when it eventually blew up. And, of course, our fund benefited while Fidelity was pushing the price of the stock up with their huge buying spree.

It can be easy to be fooled even with a team of analysts

The fake Avon Products Inc. takeover proposal last week reminded me of many similar situations in the past. It seems anyone can write a press release about a takeover offer, and cause lots of stock activity without any justified basis or intent to actually make a valid takeover offer.

In July 2005, the company behind the World Poker Tour was public (WPT Enterprises Inc.), and headlines trumpeted a cash takeover at a 100% premium. The stock traded at US$17, and the US$700-million bid was for US$35 per share.

Our investment team looked at the deal and decided it was worth playing, so we started buying. As it turns out, the deal was almost as fake as the recent Avon one, and we lost a big chunk of money on the trade.

That the so-called bid was initiated by one of the world’s best poker players, Doyle Brunson, did not make us feel any better. We were completely and totally bluffed on that one. WPT was eventually bought, at a very low price, and the shell company is now in the oil and gas business.

Sometimes everything works out just perfectly

An analyst and I in 2009 discovered a small company called Diedrich Coffee when it was trading near US$2 per share. What tweaked our interest? The company reported solid earnings and the shares had hit a new high, which we always like to see.

We thought, after doing some research, it looked pretty good, so we started buying. Our buying (it was a small company at the time) pushed shares to around US$4. We thought it might double from there, so we were fine with that.

Well, business exploded all of a sudden (it made K-Cups for coffee machines, which were taking off like a rocket) and the shares quickly hit US$8, then US$10, then US$15, then US$20 — all in the space of a year. Our boss thought we were geniuses.

Then one of the best things a fund manager can experience happened: a bidding war erupted for Diedrich between Keurig Green Mountain and Peet’s Coffee & Tea. The final takeover bid by Green Mountain was US$35 per share.

That one certainly made up for a few of our mistakes that year.

Illustration by Chloe Cushman/National Post

Peter Hodson, CFA, is CEO of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (www.5iresearch.ca).